What’s Up with the Stock Market?

[heavyd]

“Second, there is one single piece of information that this board believes in and that is different from the mainstream perception. This one piece is housing and credit.”

RSeiser, as a buy-side analyst I have literally seen dozens of presentations over the last 2 years about what a housing slump means to the US and global banking systems. If you can believe it, Wall Street is even more obsessed with this issue than readers of this site!

My point is that investors have long anticipated a housing slowdown and have quantified the impacts that it will have on the economy and the banking / credit system here in the US and around the world. And yes, a lot of investors anticipate a real crash in housing prices, much worse than what we’re seeing in S.D. to date.

In other words, the generally pessimistic views on housing expressed by most visitors to this site are the CONSENSUS views of investors around the country and indeed around the globe.

Clearly, these views are not shared by a lot of real estate market participants here in S.D. (realtors, developers, people who bought at just about any point in the last 24 months…), who will have their asses handed to them as prices roll over.

But seriously, what would you expect them to say?

[rseiser]

Yes, I agree, that is has been presented and reported on all over the country. You are right, it is not a secret. But you know, after a few months everybody has heard it and since it hasn’t hit yet, they kind of think how bad can it be. After a few months of a break, even I don’t believe in it anymore emotionally, maybe it doesn’t happen at all. But then you go back to logic and go over the numbers and then you realize everybody is just numbed from the news. The people around me still want to buy houses, they still think it will go up next year. ARMs are still going to reset. Lenders are still writing credit at ridiculously low rates, and people still invest in mortgage backed securities, since it’s the best deal around. The best of all are the banks who offload all these bundled mortgages to wall-street, and then their next door collegue in the investment department buys all of them back by investing the bank’s and client’s money in them.

Sorry for the rant, but “nothing is over” yet, and nobody in his gut believes anymore that it’s going to matter. It hasn’t so far so why bother.

But on a different note. Hedge-funds also invest a lot into MBS and derivatives. I heard they are not doing very well this year. (Besides Refco, GM-bonds, Amaranth, and Vega)
Have they improved a lot with the latest rally? What are their typcal returns YTD?

[heavyd]

Hedge funds on average are up just 6-7% YTD, with a lot of dispersion (ie, I know guys down 10% and up 30%). I am sure the latest rally helped a bit, but not much. There will probably be some more fund implosions over the next few months as managers take on risk to try to finish the year in double digits.

I don’t know anyone in the investment community who thinks the worst is over in housing / credit — things will get ugly, but I think that’s fully priced in at this point.

All I’m saying is, let’s not take the admitedly INSANE views of some of the people we meet in the S.D. real estate market as consensus views. I am an S.D. native who grew up here but worked elsewhere until early 2005; one day shortly after moving back here, I remember silently rolling my eyes as I overheard a 20-something woman at a bagel shop in Carmel Valley say, “Yeah, maybe housing prices will level off, but people NEVER sell for less than what they paid!”

[Steve Beebo]

Powayseller –

I would take the challenge vs. your CDs, but could we start the calculation this past March so I could have a little head start, or do we have to start from now?

[Chris Scoreboard Johnston]

Heavyd

Thanks for telling everyone what you just did about the housing sector. I told everyone in this forum exactly what you have just described about housing industry stocks a few months ago, the valuations are way too attractive for a short entry. I did not say that I would buy them, just that the ratios were way to attractive for shorts. I like high p/sales ratios, high debt, and declining earnings for short trades. These stocks have none of those even though they have been in a downtrend.

[powayseller]

Steve,let’s start from last March, and go through March 08. We need to let it run for 2 years, because it involves dumping stocks before the recession, getting back in at the earliest sign of a turnarund right in the middle of the recession, and then riding it up. If you want to just run through March 07, that’s okay too. Let’s just compare CD return vs. whatever funds you’ve got.

[powayseller]

Alan Gin issued his San Diego leading economic indicators. They are *down* for the 5th consecutive month.

“Stocks are trading at very high multiples of earnings but at a time when earnings are also at record levels. How much higher could they go? And if you did buy at this level, could the reward really be worth the risk? Ultimately, don’t stocks depend on the economy?

Dear reader, we give you the short answer: Stocks are not a good investment. Not at these prices. That doesn’t mean they won’t go up any more. It just means that it is unwise for you to follow them. There’s more downside to worry about than upside to hope for. Take this little boost as a gift from the gods; sell on rallies.

How long can US housing and stocks go in different directions, following different rules as though they breathed different air and ate different bread? Not long, we suspect. If houses are already beginning to climb down from the clouds…stocks, cannot be far behind.
“- Daily Reckoning

Every single housing market collapse has led to a recession, except the 2 housing market collapses that were bailed out by the Vietnam and Korean Wars. The slowdown has already hit San Diego.

[Steve Beebo]

PS –

Six funds:

ABALX
AMRMX
ABNDX
CWGIX
CAIBX
AMECX

You’re on –

[no_such_reality]

bagel shop in Carmel Valley say, “Yeah, maybe housing prices will level off, but people NEVER sell for less than what they paid!”

ahem, she’s basically right. People don’t sell for less than what they paid. Only when absolutely forced to does the average person do so. Even most investors won’t. And in the end, the majority of SD buyers are still regular people that will hold until the bitter end and they can get out for what they paid for it. Otherwise, the bank is going to have to take it back.

Prices may fall, they may collapse, but liquidity will go with it. Frankly, given how illiquid housing is even in a normal market, I think the non-liquidity once the contraction gets going is going to make it look like the Gobi.

[powayseller]

My friend put it well: “this euphoria can turn on a dime, like in 2000”.

[justme]

In 2001, we had a stock market crash, and all the money
sloshed into the housing market.

In 2007, we will likely have a full blown housing market
crash, and I wouldn’t be the least bit surprised if all
all the cash goes sloshing into the stock market.

This is not a prediction, I just see it as a real possibility.

[jepsd]

I disagree. Stocks will not benefit and here is why: The stock market has already directly benefited from the lending bubble. The excessive borrowing has not only allowed excessive consumption, but also equity investments that lifted the stock market over the past 3 years.

And in the end, the majority of SD buyers are still regular people that will hold until the bitter end and they can get out for what they paid for it.

People are attached to their homes, not their stocks. When the ARM adjusts, the only place there is money to grab is from the 401(k), the Roth, etc. Lots of equity investments will be liquidated to save the house. The house will be the last thing a family wants to part with.

I personally know a family who recently liquitated Roth IRA’s to buy land for building a house.

[powayseller]

jepsd, is there a way to find out how many people used equity from their homes to invest in the stock market? I’ve read this before: MEW was used for consumption, but also for buying second homes and stocks.

I have a question for the stock market bulls: do you believe we are in a housing bubble?

Everybody who believes in a housing bubble also is waiting for the stock market to go down: International Monetary Fund, Barry Ritholtz, Nouriel Roubini, Calculated Risk, Tim Iacono, iTulip (Eric Jantzen), Daily Reckoning, Christian Science Monitor, Yamamoto Forecast, Bill Fleckenstein, I could go on an on. All these people, as well as many media stories, link the bust of the US housing bubble with a busting stock market and some of these guys go so far to forecast a recession.

So it seems that if you are bullish on stocks, you don’t believe this is a housing bubble, or you think housing won’t drop significantly, or you don’t realize that housing is linked to the economy.

Could you please explain why you think the stock market will go up, and your view on the housing market?

[jepsd]

No, I wouldn’t know how to calculate such a number.

However, if the national savings rate is negative and people are buying homes with 100%+ financing as well as funding a 401(k) or Roth, or other IRA, etc, a certain amount of money to fund these retirement accounts is effectively coming from borrowing and not from earnings/savings.

When housing payments ratchet up (due to ARMs, which not everyone has), people will do everything to save their houses since I believe that the consensus on the street is that the house is the best retirement investment, not equities. People are emotionally attached to their houses. They “bought” houses mainly based on emotions, so they will try to save their houses. Some will be successful at holding on and others will not.

That is why both stocks and housing will go down. People will try to save their house at all costs.

[Chris Scoreboard Johnston]

I think we are about to start going down in the stock market. I have short term sell signals, and we are right at the 2.0 std deviation on a 6 month regression channel on the upside. Whether or not it will be the beginning of a big drop or not I have no idea. However, I will be shorting the S&P on Monday contingent upon certain opening parameters. Then it will depend on the opening as to where the orders are placed.

I am not going to give all of those details out here, but anyone who is inclined to try a short entry, this is a good spot in my opinion.

[Author]

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